Thoughts, ideas, suggestions and education from financial adviser Jim Ludwick, Founder of MainStreet Financial Planning, Inc. of Odenton, MD; Washington, DC; New York City, and Santa Barbara, CA

Saturday, April 27, 2013

Why are Soc. Sec. retirement benefits so confusing?


Why are social security retirement benefits so confusing? Don't say it's so financial advisors, financial journalists, financial educators and former Social Security Administration officials can write and sell books. You could say it's so I can write a blog. There, now we're even.

Now selling books, doing book signings, writing blogs, doing interviews, and giving speeches certainly sets you up as an "expert" in some circles.  Just check out social security retirement benefits on amazon.com to find out that it appears to be a growing book category probably because all of us baby boomers are staring retirement in the face.

The other day I was reading a question and answer on Fox Business News' website concerning ex-spouse benefits. I'm assuming if you're reading this blog you know about ex-spouse benefits.  I'd venture to say in my practice, more that half of eligible ex-spouses have no clue they might be entitled to this kind of benefit.
I was led to this story by Google Alerts "Social Security", which every couple of days sends me a summary of stories on social security.  It's a great help to someone like me who is busy giving advice and needs help to find all the stuff that's out there on a particular topic.
 
Anyway, I'm fusing about the answer which first focuses on the confusing rules that say before full retirement age you don't really get any choices when it comes to social security retirement benefits. I can't imagine most readers giving up after about the second paragraph of the response to the question. I would have answered the question differently.

Taking social security benefits whether on your own work record or your ex-spouse's (or even your current spouse's work record) is a bad decision if you plan to continue working at a modest income or higher job which is a fact stated in the question.  I would have started out answering the question by saying you stated you are continuing to work until age 66 your full retirement age.  Then forget about any kind of spousal benefits and figure out how your son can do things on his own. Then I would have laid out the rules and the readers could fall asleep before the got to the end of my response.

I know that sounds harsh and cruel to answer the question this way, but social security is an insurance program to partially support needs in retirement and is structured to accomplish just that. The writer of the question wasn't retiring, she was looking for money as a single parent to support what appears to be an able bodied adult child who is unemployed and is going to college.
 
My opinion is not going to change how social security is structured. I leave that up to the congress.  Ok, stop laughing, but that's how we got to this point in the first place.  What I can argue for, is more direct answers to these kinds of questions.  Secondly, all of us in this arena of educating and giving advice need to do a better job and drop the ignorance and misunderstanding factor much lower that it currently appears.

Tuesday, March 26, 2013

Why Don't Some Retiring Feds Get It?

Why don’t some federal workers nearing retirement in today’s interest rate environment, get it?  It’s all about the G Fund and bond allocation in a time period approaching increases (ok, I have no crystal ball) in interest rates after having been kept artificially low by the Federal Reserve in an effort to simulate the economy.   This is called interest rate risk.

Recently I was counseling a newly retired federal worker as he approached his 70th birthday and faced his first required minimum distribution, having received an announcement from TSP officials of his need to make some decisions.

Versus an IRA, the TSP is much more limited in taking withdrawals in retirement.  You can take up to two partial withdrawals and you can take a fixed amount monthly or annually or just your Required Minimum Distribution (RMD) of about 3.6% of last year’s balance.  IRAs are a lot more flexible and give retirees a lot of options beyond the same percentage withdrawal requirement beginning at age 70.5.

But let’s stick with our retired federal worker for the moment.  Faced with blunt demands from TSP, most workers opt for a rollover to a traditional IRA.  Folks who sell products (mutual funds, stocks, bonds, annuities) like this.  It’s an opportunity to make some money, sometimes at the consumer’s expense (another story).

We frequently encourage our clients to take a partial withdrawal from the TSP and leave the remainder in the G Fund.  Why?  Because its magic.  How is it magic, you ask? Well, it doesn’t go down in value like normal bond funds when interest rates rise.  Why not?

The G Fund, for federal workers and the military, is special.  It’s based upon an index of various maturities of Treasuries and that is what depositors in the G Fund receive each year.  It is not subject to the supply/demand fluctuations like other securities in the rest of the TSP and in the real world of securities transactions.

Most retirees become more conservative in the allocation to stocks (equities) as they grow older for two reasons: 1) they don’t want so much volatility opportunities and 2) they want more assured income that bonds or cash instruments like CDs or immediate annuities offer to depositors or owners.

With that assured income stream comes the risk of early redemption.  The market re-prices bonds and bond funds just like appraisers re-price houses based on previous sales.  CDs suffer an interest penalty for early withdrawal. So if interest rates have risen since you purchased your bond or bond fund, then those higher paying bonds are more attractive to new purchasers.  Your bond or bond fund will have to sell at a discount (read: loss) to meet the same income stream for a potential purchaser.

The G Fund does not operate the way we just described.  It never goes down due to supply/demand.  It’s not publically traded.  It is a true fixed (annually) income stream.

So Federal workers, after you’ve determined your comfort level and/or need of exposure to equities, consider using your TSP as your “fixed income-holding bank” up to the percentage of fixed income you need in your family asset allocation.  If you’ve been a diligent TSP saver, you’ll have more than enough in your TSP to have your bond percentage in the G Fund and either retain the rest in equities, or for more flexibility send the equities to a rollover IRA.

Now this is just a general discussion and not investment advice.  For that you have to pay me. This concept, however, comes to you courtesy of the TSP.  Don’t forget after you bail out of the TSP as a retiree, you can’t get back in.


Jim Ludwick is the President and founder of MainStreet Financial Planning, Inc., an hourly fee-only provider of advice on many financial issues.  This is just an educational story and not individual advice, says my attorney.


Tuesday, March 19, 2013

Andy Made Me Do It




You have probably enjoyed listening to and watching Andy Rooney.  Me too. I’ve read a couple of his books.

Andy didn’t always understand what was going on, and neither did I.   His introductory sentence, “How come….” always got my attention. I sensed a fuss was coming.  Andy was a person I could identify with as I ended watching an hour of investigative reporting on 60 minutes.  Yes, I miss him.

In my daily life, mostly involving financial services, I come across a fair amount of products and actions that I just don’t understand.  Human behavior probably fits in this category too; in fact it either is producing some consequence or is a reaction to some event or product pitch.  You know what I mean.

I find myself frequently asking myself the question in my mind, “Why would they do that?”  It could be about someone’s purchase of a financial product or a news report about an SEC investigation.  I suspect others like me have a similar reaction because of your personal observation or reading the financial news.

So I’ve decided to change the direction of my blog, Advice Only Musings, in a fussing sort of direction, much in the style that Andy Rooney might have done if he was a financial advisor/observer.  You may now switch the dial if this does not appeal to you.  However, you do this at your own risk of missing some important and useful fussing.

I’m not going to fuss in this first edition other than announce the change of focus as I observe the comings and goings of products, promotions, styles, and behaviors as reported in the press or other medium including my personal observation.

If you too ponder these seemingly strange occurrences in our daily financial lives, I’d appreciate your input and feedback.   I appreciate the interaction with clients, colleagues, acquaintances, and general correspondents as we travel this road of making our dreams come true, or seeing them dashed on occasion.  Maybe a fuss or two will help you avoid the later.

Until our next engagement, here’s to greater understanding, as Andy would have it.

Jim 

Friday, December 28, 2012

Overcoming Obstacles to Achieving Financial Goals



We are in the goal business. Helping people define, refine and achieve their financial goals.

What does it take to achieve and surpass financial goals?

1.     It takes willpower.  Remember the “protestant work ethic” of delayed gratification?  Starting early and staying with a plan is a key component to attaining financial success.

2.     It takes resources.  Income in excess of expenses is the primary means of developing resources to put towards goals like retirement, housing, education and travel.

3.     It takes knowledge of knowing where you’re going and if you’re on track to get there.  That’s called feedback.  You need a mechanism to keep you informed of your progress and to alert you to altering your actions to stay on track or ahead of schedule.

Now what are the most frequent obstacles we see that prevent goal achievement?

1.     Procrastination.  Lower priorities take over disposable income and not enough resources are directed to higher priority, but longer-term goals.  Parties, video games, you name it. In our society it’s easy to become diverted by slick marketing, peer pressure, and poor habits.

2.     Lack of resources.  Decisions that affect expenses whether they are day-to-day living expense decisions or long term debt decisions like student loans lead to an inability to save adequately for long term financial goals.

3.     No goals in the first place.  We call this the “seat of the pants” plan.  Without a roadmap any highway will take you there.  The majority of baby boomers might fit into this category.  For most of them it’s too late and they are going to work many more years and retire at a much lower standard of living than they otherwise might of because they never planned ahead.

So what can we take away from this discussion?

1.     It’s never too late to plan although the longer you wait the harder it is.

2.     It takes discipline and a denial of other counterproductive opportunities.

3.     It takes a feedback mechanism, including coaching in some cases, to stay on track and know when to hold ‘em and when to fold them (thanks to Kenny Rogers).

As this year comes to an end.  We want you to be thinking of goals and what you will be doing next year to achieve them.  Good Luck.

Friday, November 23, 2012

Why I Fired My Bank



Seems like a catchy title doesn’t it?  Well let’s see if you think I did the right thing by the time you get to the end of my story.
My personal bank is USAA Federal Savings Bank. This story is not about them.  I love USAA’s one and only San Antonio, Texas branch which I have never visited, but they always seem to be the top rated bank in the United States.  I know why.  Whenever I have a question, need, or problem, I just pick up the phone or email them and ….BINGO, I get a resolution.
Several years ago USAA started letting us drop our deposits off at the local UPS store.  Then they let us scan checks at home and deposit them over the internet.  Then came their iPhone app and I was in heaven.  Wish I could do this with my business account.
Now I run a small business and USAA doesn’t have business accounts.  I asked the owner of the local UPS store where I should open my new business account ten years ago.  He pointed me to the local bank just down the street.  Nice manager, friendly staff and good hours especially for drive in deposits.
Several years later our local bank got bought out by the regional bank from New York State.  Not much changed except the manager got promoted and the teller staff retired or moved on.  Things seemed to be working ok but going to the bank every day to make deposits became a chore for my assistant or my wife, but it was usually either done on the way home or during errand time at the beginning or ending of the work day.
A couple of years ago the big bank (P**) bought out the regional bank. You know where I’m going, don’t you?  More staff turnover. Everyone was a part timer or so it seemed. They all wished me a nice day, but when anything went wrong I had to find it, no one ever called to tell me there might be a problem.
Now banks make a lot of money on the deposit float.  I should know, I’ve worked for two of them. Our business has a nice five figure float where we don’t make a dime, but P** bank does.
Last year I noticed that the big bank was letting people make deposits with their iPhone but they had a limit.  We have five offices around the country and really enjoy making deposits on the iPhone since we travel for business. I found out the monthly limit was very low for our kind of business and for our average deposit. So I went in the see the branch manager - the new branch manager. I observed they had cut back the lobby hours and the drive in hours.  No early or late drive in business at all.   (Our local grocery story bank branch is open seven days a week!)
I explained to the new manager my needs. He listened, but it was obvious he had no power to amend the low limits even though our float was ten to fifteen times larger than any conceivable check we might deposit and then bounce.  We asked him to elevate the issue and have P** make an exception.  A week later the “business banker” called.  He listened to my story.   He said couldn’t change anything, but would call my first branch manager (from 10 years ago) who was now in some elevated position in the bank and address the issue with her.
A week or so later my voice mail message told me sorry, no change in their limits. Guess how I felt? Guess what I did?  Right, I went to Google “business banks that let their customers bank remotely and use their smartphones to make deposits”.
BINGO. EverBank is now our bank. The monthly limit for smartphone deposits is 2.5 times our normal amount of deposits. FedEx delivers the paperwork the next day.  New checks come in a week along with the debit card.  They call to see how we’re doing.  A month later they call again to check on us.
We are winding down our relationship (sic?) with P**.  Somehow the auto payment for the Amex bill didn’t get changed in time so we are overdrawn.  Does the big bank call, email, text us to let us know they’re charging us $25 for the overdraft and $7 a day for a beginning $141 negative balance? You can guess the answer. 
Today I paid the big bank $231 in cash and they said they would close the account in a few days.  Can’t even close an account on the same day!!  Well, goodbye big bank.  We admit we should have done this sooner, but it’s a pain to switch banks.
Sure do miss all the old employees from the local bank. In ten years, they were the only ones who seemed to really care about our business.
Conclusion: Every three years or so look around and comparison shop your vendors. There are companies out there that really want to listen to your needs and will do what it takes to exceed your expectations.

Saturday, November 3, 2012

It's Never Too Late: But Get Going Now!


We are in the goal business. Helping people define, refine and achieve their financial goals.

What does it take to achieve and surpass financial goals?

1.     It takes willpower.  Remember the “protestant work ethic” of delayed gratification?  Starting early and staying with a plan is a key component to attaining financial success.
2.     It takes resources.  Income in excess of expenses is the primary means of developing resources to put towards goals like retirement, housing, education and travel.
3.     It takes knowledge of knowing where you’re going and if you’re on track to get there.  That’s called feedback.  You need a mechanism to keep you informed of your progress and to alert you to altering your actions to stay on track or ahead of schedule.

Now what are the most frequent obstacles we see that prevent goal achievement?

1.     Procrastination.  Lower priorities take over disposable income and not enough resources are directed to higher priority, but longer-term goals.  Parties, video games, you name it. In our society it’s easy to become diverted by slick marketing, peer pressure, and poor habits.
2.     Lack of resources.  Decisions that affect expenses whether they are day-to-day living expense decisions or long term debt decisions like student loans lead to an inability to save adequately for long term financial goals.
3.     No goals in the first place.  We call this the “seat of the pants” plan.  Without a roadmap any highway will take you there.  The majority of baby boomers might fit into this category.  For most of them it’s too late and they are going to work many more years and retire at a much lower standard of living than they otherwise might of because they never planned ahead.

So what can we take away from this discussion?
1.     It’s never too late to plan although the longer you wait the harder it is.
2.     It takes discipline and a denial of other counterproductive opportunities.
3.     It takes a feedback mechanism, including coaching in some cases, to stay on track and know when to hold ‘em and when to fold them (thanks to Kenny Rogers).

As this year comes to an end.  We want you to be thinking of goals and what you will be doing next year to achieve them.  Good Luck.

Thursday, October 4, 2012

Scary time this year


We are now in October, with nine months of the year behind us.  That’s a scary thought even though Halloween isn’t here yet.  The good news first:
First quarter 2012 saw the US, Europe and Emerging Markets up big time: +13%/+11%/+14%.
Second quarter 2012 saw them down:  US -3%/ Europe -7%/ Emerg Mkts -9%
Third quarter 2012 was good:  US +6%/ Europe +9%/ Emerg Mkts +8%
Cumulative Year to Date:  US +16%/ Europe +16%/ Emerg Mkts +12%

Naturally, looking in the rear view mirror is the easy part and things are looking good.  But that’s only stock market investments. Bonds are at low historic rates. Since we believe the stock market is forward looking, we have no idea where it will end up on December 31st.  The signals are mixed.  Staying fully invested is still our thought for right now.  However, that’s always been our thought.

We had a do-nothing congress this year so we remain in tax limbo until very late this year or early next year depending on how far the can is kicked down the road.

Capital Gains Fever

For many taxpayers it will make sense to harvest capital gains in 2012 to take advantage of current lower rates.  If we haven’t helped you before then you might not be familiar with this “harvest” term or technique of taking advantage of lower tax rates or losses to offset gains.  On the other hand, if you will be passing on assets and are in the 15% tax bracket or lower, then you might want to hold on for the stepped-up basis upon death.  We are sorry it’s so complicated, but we will point our finger at those 535 down in Washington, DC.

Medicare Surtax: 3.8%

Now we all have to understand where we will be on our 2013 tax return when it comes to Modified Adjusted Gross Income (MAGI) and Net Investment Income (NII).  For couples with over $250,000 in income filing jointly; married filing separately, $125,000; and all other taxpayers, $200,000; we will need to be open to strategies to reduce or eliminate the impact of this additional tax on certain income above these levels.

Other Tax Strategies for 2012

If we need to see more income this year we can explore converting some or all of an IRA to a Roth IRA.  The conversion will be taxed at today’s lower rates if we believe rates go up in 2013.  There also might be an opportunity to unwind this conversion up until fall of 2013.  We can also consider exercising non-qualified stock options if 2012 if we’re lucky enough to have some.

Don’t forget about Estate Taxes

The rules are set to lower the federal limits of individual exemption (and some states that are tied to the federal number) from the current $5,120,000 to $1,000,000 come January 1st, 2013 unless the you-know-who’s do something. Fat chance. The President wants a $3,500,000 individual limit and the opposition party wants to eliminate the tax altogether. Who knows when and where we will end up.
OK. That was the bad news.

Good news, bad news, and now great news: Jennifer Ventola has joined MainStreet as our new Client Services Manager. You’ll be hearing a lot more from her if you’re an ongoing MainStreet client.

We sincerely thank you for using our services in the past. If you are an ongoing client we encourage you to get your statements and questionnaires to us in a timely manner now that they are starting to show up in your mailbox or email inbox.  Scary means we will be working harder for you than ever before.

All the best, Jim and Anna            info@adviceonly.net  goes to both of us